InterOil's (NYSE: IOC) latest talks with the government of Papua New Guinea have begun to break down and it is looking more and more likely that the deal will fall through altogether. Minister for Petroleum and Energy William Duma has set a 180-day trigger for termination of their 2009 project agreement, in which InterOil is set to deliver between 7.6 million-10.2 million metric tons of liquid nat gas per year from its Elk and Antelope gas reserves.

In 2009, the government and InterOil reached this agreement, and the company promised to use state-of-the-art technology and internationally recognized operators with experience in similar-sized assets. However, progress has been very slow, with the company only proposing a phased development of the reserves and no yet naming an operator.

ExxonMobil (NYSE: XOM) has been constructing a $15.7 billion physical and liquid natural gas plant, as part of Papua New Guinea's foundation project. Duma said that the government has worked with InterOil to ensure that the Elk/Antelope assets are monetized in a manner consistent with these high standards. "InterOil has for too long insisted on a development structure, which is designed to only meet its objectives of controlling the asset and the pace of developing it. This has led to a proposal calling for a piecemeal, incremental and fractured development implementation operated by InterOil and its affiliates, rather than by large-scale international operators with experience and capital."

Minister Duma further called for InterOil to sell it at a minimum 50.5% stake in the Elk/Antelope reserves to a major company with experience operating a plant of this size. He added that the upstream activities, which InterOil wants to control under its plans, must be operated by the international company, not by InterOil or its affiliates.

The company's affiliate in the region, Liquid Niugini, recently wrote a letter to the Department of Petroleum and Energy, which claims that the government's notice of intent to terminate the project agreement is invalid. The company claims that, for the state to terminate the agreement, the state must prove that the company has failed to take certain steps, whereas it is currently just upset with intentions to take future actions.

Earlier this week, InterOil claimed to be in talks with Chevron (NYSE: CVX) to fulfill this operator role, although Chevron has yet to make a formal statement on the matter. Duma and the government has consistently hinted that they would like Shell (NYSE: RDS.A) (NYSE: RDS.B) to be the international operator. Investors should watch the general elections this month for further clarity on how the government will act.